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European bank stocks fuel AGF fund's rebound

What are we looking for?

Leaders and laggards among European equity funds.

The euro zone is back in the spotlight again after the European Central Bank last week raised its key interest rate to fight inflation, while Portugal followed Greece and Ireland to ask for a financial bailout.

The screen

We looked at the eight best and eight worst performers among European equity funds from Jan. 1 to April 7. U.S. dollar, segregated and duplicate versions of funds were excluded.

What did we find?

Last year's dog so far is this year's star.

AGF European Equity Class leads the pack with a 9.8-per-cent gain after shedding 20 per cent in 2010.

"We don't deny we did badly," but it was because the fund's value style struggled, when growth stocks became fashionable last year, says its Irish-based manager John Arnold. And the fund's 50-per-cent weighting in financials took a big hit amid concerns about euro zone debt woes.

When bank stocks got crushed, he even bought more to keep the fund's 33-per-cent weighting in this area.

Now, the fund, which is 23 per cent in French banks, is benefiting from their rebound. "Most people misunderstand what is happening in the banking industry," he suggested.

Bank stocks got hurt, but it was from cutting dividends to boost their Tier 1 capital ratio [a measure of a bank's capital strength], which is now 11 per cent on average, Mr. Arnold said. "You have seen a dramatic improvement in the balance sheet of European banks."

BNP Paribas and Société Générale SA, whose stocks helped drive his fund this year, are reporting improved profits and are raising dividends again. Other winners this year include insurers AXA SA and Aviva PLC.

With 42 per cent invested in France and 35 per cent in Britain, the fund is less affected by the euro zone debt problems. "Portugal, Greece and Ireland combined are only about 6 per cent of the European economy," he said.

He is bullish on the European stock market this year. "Europe is cheap relative to the rest of the world," and trades at 13.5 times trailing earnings versus 17 per cent for the U.S. market, he said. "Traditionally, in the third year of a bull market, you should get double-digit returns....What is going to drive the AGF fund over the next five years is the dividend yield, not just from the banks, but also from the insurance and drug companies."



AssetsYTD % rtn3-mo % rtnCalendar year % returns
Fund nameMER ($-mil)(Apr. 7)(Mar. 31)201020092008200720062005
Best 8 to April 7
AGF European Equity Class3.03409.59.87.3-20.315.1-36.6-11.741.010.0
HSBC European-I2.3945.56.64.5-3.815.3-37.0-
Investors European Div Growth A2.7037.35.23.8-4.512.3-38.4---
CIBC European Equity2.56215.75.14.2-1.414.6-24.3-5.828.04.4
TD European Index1.0044.25.13.5-2.012.4-32.2-
CIBC European Index1.1755.05.03.4-1.411.4-31.6-3.631.55.2
Scotia European2.6919.
Quebec Professionals European Equ1.49-
Worst 8 to April 7
Dynamic European Value2.4153.9-2.0-3.611.128.7-38.3-19.336.45.7
BMO European2.4270.50.5-0.24.613.7-39.4-8.934.07.3
BMO GDN European AD Sr2.423.10.5-0.24.6-----
Trimark Europlus2.70122.
IG Mackenzie Ivy European-A2.71238.
Mackenzie Ivy European Fund2.48108.01.50.6-12.19.9-37.4-5.529.14.9
Fidelity Europe-A2.5432.
Stone & Co. EuroPlus Div Growth A3.
MSCI Europe ($ Cdn)5.44.3-1.016.2-32.6-
Source: Globe Investor, Bloomberg

© 2007 The Globe and Mail. All rights reserved.

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